In this video we explore a rule-based approach which caps and collars each year’s inflation adjustments. This way, retirees can avoid extreme changes to their income withdrawal, at least in a nominal sense. A cap-and-collar approach also matches the typical retirement spending pattern. Income increases in real terms but at a slower pace than inflation.

In this video, we show how to illustrate real (inflation-adjusted) and nominal withdrawal from a portfolio under a wide range of inflationary environment. With this, we can help a client can visualise how their income is likely to change over time, depending on the withdrawal strategy adopted.

We're delighted to announce that we've now added a new scaled withdrawal feature to Timeline, the sustainable withdrawal rate app. This new feature enables financial planners to illustrrate the impact of scaling up/down income withdrawal from a portfolio at different phases of retirement.

The traditional assumption for sustainable withdrawal rate is that a client will spend the same amount of inflation adjusted income through out their retirement. Yet, the assumption is not supported by cold hard data on spending pattern of retirees.

Research in the UK shows spending in retirement declines progressively in real terms. As people get older, they spend progressively less! From age 65, spending typically declines progressively and is about 35% lower at age 80.

In the US, research found a similar trend among retirees. As finacial planner Micheal Kitces noted, real spending tends to decline a little at the beginning of retirement, accelerates its decline in the middle retirement years, and then slows its decline again in the final decade. Researchers identified 3 unique phases of retirement dubbed:

The Go-Go years, the active first decade of retirement,The Slow-Go years, the less active second decade of retirement, andThe No-Go years, the final decade of retirement when most discretionary spending stopsStrangely, it's has been difficult, even impossible for financial planners to take this into account when illustrating sustainable withdrawal from a client's portfolio.

That's until now.

With this new feature on Timeline, financial planners are able to illustrate the impact of scalling up/down spending at different phases of retirement.

For instance, you can illustrate a scenario where the client wants a withdrawal of £40,000/yr from age 65 to 75, then £30,000/yr from age 76 to 85, and £20,000/yr thereafter from a £1M portfolio. Here's what real (inflation adjusted withdrawal looks for all rolling 30 year periods between 1900 and 2016.

In this short video, I use Timeline app to show the year-end balance under all historical scenarios since 1900, for any given withdrawal amount. We can see if and when the portfolio is exhausted under each scenario. Given the wide range of outcomes, we can also see the worst case, the 10th, 50th and 90th percentile scenarios.

Timeline can uniquely illustrate flexible spending strategies (i.e., Guardrails and Ratcheting) and has more sophisticated illustration tools to show the impact of longevity and how much wealth accumulates in the non-failure scenarios